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Are Coal Power Plants Now too Expensive to Pursue?

A couple years ago I had lunch with a top executive of one of the state’s leading utilities. Here’s the gist of the question I put to him.

“I know you guys want to build a new coal plant nearby here, and I believe you when you say you fully intend to sequester CO2 down the road. But here’s the problem. You can’t even begin building without first raising the price of electricity. We can argue how much – 15, 20, 30 percent – but we all know it’s going to go up.”

He nodded.

“Well, I’m not an economist, but I do remember from Econ 101, that if you raise the price of something, demand goes down. Furthermore, if you raise the price of something, for which the market is already soft, where demand is already flat or declining, and for which people have readily available alternatives – demand could go down a lot. So you raise rates – demand goes down, revenue goes down, you can’t pay the cost of your note for the new plant.”

“So you raise your rates again. See what I’m getting at? It’s a downward spiral. We’ve seen this before in the 70s and 80s, when, in the wake of the oil price rises, people realized for the first time that energy conservation made sense, and electrical use flattened out – completely flummoxing the economic planners who said that would destroy the economy.”

“Your position is unenviable. If you build a giant new power plant, you’re riding into a box canyon economically – the economics of the death spiral are unassailable – and frankly, I think the last thing this state needs is another one of our flagship companies to be circling the drain.”

The utility said it was cancelling the new clean coal plant project because of the same market factors that led it to defer development of the project in May 2010. Those primarily are reduced customer demand for electricity due to the recession and slow economic recovery, surplus generating capacity in the Midwest market, and lower natural gas prices linked to expanded shale gas supplies. Lower natural gas prices make new coal-fired power plants less economically attractive.

I wonder if it also had anything to do with this recent announcement out of Minnesota?

Minnesota’s second-largest electric company has spent $437 million on a recently completed coal-burning power plant 85 miles west of Fargo.

Built with the encouragement of North Dakota’s political leaders, the plant burns lignite mined in that state. It has best-available pollution controls and draws city wastewater instead of fresh water. At full power, the new plant could supply about 63,000 homes.

Instead, owner Great River Energy is shutting it down.

While investing hundreds of millions of dollars in power plants always carries risks, the tale of the Spiritwood Station is an extreme case. The head of an industry trade group couldn’t remember another new U.S. coal plant built to supply power all the time that was immediately mothballed.

A combination of factors made Spiritwood a financial drag on Great River Energy (GRE), a Maple Grove-based wholesale cooperative serving 650,000 customers from the Iowa state line to the Canadian border. These included slower-than-expected growth in electricity demand, lower prices on power sales to the grid and the loss of a key industrial customer for some of the plant’s steam.

“We could run it, and lose money half the time,” said Rick Lancaster, vice president for generation at GRE.

A soft economy is certainly a factor in this situation. But soft or not, the economic fundamentals don’t change. And the dynamic is the same, whether the new facility is coal, nuclear, or gas. The advantage that gas turbines have over coal and nukes is that they are quicker to build, meaning cost of capital is lower.

And, a quicker build means you don’t have as distant a time horizon to project electrical demand and economic conditions. Renewables, particularly, at this stage, wind, are even much quicker to build, and can be built incrementally – 10, or 50, or 200 MW at a time, instead of betting the farm on a 5 or 10 billion dollar project, you can plan, and build within your means, in a time frame you can see much more clearly.

Making it even more interesting is the emerging economics of solar photovoltaics, which have only come into sharper focus in the last year. You can argue the time frame, but at some point, in most parts of the country, over the next 3, or 5, or 10 years, photovoltaics become cheaper to install than buying power from a coal burning utility. That’s when the paradigm shift begins, with unpredictable results — but a coal project starting today might well be nearing completion just in time for its obsolescence.

A lot of the ideas we’ve had about power generation for the last 80 years or so are about to go out the window, in an industrial revolution that’s going to make the internet seem like a minor speed bump. In fact, the new electrical grid will use the technology of the internet, and look a lot more like the internet than the current centralized arrangement. This will be a time of creative destruction for utilities – some of whom won’t make it.

There’s no guarantee for anyone, but those that tie themselves up with enormous financial commitments to centralized projects that do not support the emerging paradigm are sure to have a tougher time surviving.

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I'm going to give a brilliant short course in energy economics in Spain next month, and as of today do not believe that I will come to any of the conclusions in the above contribution. As for the creative destruction mentioned, I think that it might be best if the word "creative" was omitted.I do believe that great changes can and will take place, but it could happen that many of these changes are nuthouse. I'm thinking of a few countries in Europe, and very definitely the United States of America. Constructing a very large power plant and closing it down soon after opening ceremonies is nothing less than a nightmare. I could of course be wrong here though, because if the firms making the Sherman tank had been closed after opening, and a better tank designed and produced, WW2 might have ended six months earlier.

Jude Clemente on December 11 2011 said:

Trust me, Fred Banks has forgotten more about energy than most of us will ever know. Professor Banks is a world renowned expert and he is exactly right on this one. Coal plants ain't going away any time soon. Some in China claim their wind projects are "vanity projects." They want money to cut emissions, and by golly, we are gonna give it to them.

Fred Banks on December 12 2011 said:

Jude - and everybody else for that matter - I think that in every country there might be some room for renewables and alternatives of various sorts. But not as much as people think.As far as I know, no country has been as intent on introducing renewables and alternatives as Sweden, but they haven't introduced them yet, although they might get around to it some day. The reason quite simply is that Swedish engineers and managers are not anxious to play the fool for a collection of know-nothings with a barely concealed urge to ruin the Swedish economy. One of these high and mighty know-nothings was at the big gab-fest in Durban, and I could tell from an interview he gave Swedish TV that he had been running off at the mouth every chance that he got. As for the Chinese, they are going to eventually bet on nuclear, but first it will be some other things. China is a big country, and there is room for a few windmills and also a few solar panels. A few.

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